Allison Transmission Holdings Inc (ALSN) 2016 Q2 法說會逐字稿

Greetings and welcome to Allison Transmissions second quarter 2016 results conference call. My name is Melissa and I will be your conference operator today.

(Operator Instructions)

As a reminder, this conference is being recorded.

(Operator Instructions)

I would now like to turn the conference call over to Fred Bohley, the company's Vice President of Finance. Please go ahead, sir.

Thank you, Melissa. Good morning, and thank you for joining us on our second quarter 2016 results conference call.

With me this morning is Larry Dewey, Allison Transmissions Chairman and Chief Executive Officer and Dave Graziosi, Allison Transmission's President and Chief Financial Officer.

As a reminder, this conference call, webcast, and the presentation we are using this morning, are available on the Investor Relations section of our website, allisontransmission.com. A replay of this call will be available through August 4th.

As shown on page two of the presentation, many of our remarks today contain forward-looking statements based on current expectations. These forward-looking statements are subject to known and unknown risks, including those set forth in our second quarter 2016 results press release and our annual report on Form 10-K for the year ended December 31st, 2015, and uncertainties and other factors as well as general economic conditions.

Should one or more of these risks or uncertainties materialize or should underlining assumes or estimates prove incorrect, actual results may vary materially from those we express today. In addition, as noted on page three of the presentation, some of our remarks today contain non-GAAP financial measures as defined by the SEC. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our second quarter 2016 results press release.

Today's call is set to end at 8.45 a.m. Eastern time. In order to maximize participation opportunities on the call we'll take one question from each analyst.

Please turn to slide four of the presentation for the call agenda. Now I'll turn the call over to Larry Dewey.

Thank you, Fred. Good morning and thank you for joining us today. On today's call I'll provide you with an overview of our second quarter performance including net sales by end market. Dave Graziosi will review the second quarter financial performance including adjusted EBITDA and adjusted free cash flow. I'll then cover the full year 2016 guidance prior -- the update prior to Q&A. Following Q&A I'll close out the call with a few general comments.

We are pleased to report that Allison's second quarter 2016 results are within the full year guidance ranges we provided to the market on April 25th. The year-over-year reductions in the global off-highway, North America on-highway and service parts support equipment and other end markets net sales are consistent with the previously-contemplated impact of low energy and commodity prices and tempering demand conditions in the North America on highway end market. Allison continued to demonstrate solid operating margins and free cash flow while executing its prudent and well-defined approach to capital structure and allocation.

Please turn to slide five of the presentation for the Q2 2016 performance summary. Net sales decreased 7% from the same period in 2015 principally driven by lower demand in the global off-highway, North America on highway, and service parts, support equipment and other end markets. Gross margin for the quarter was 47.5 percent, an increase of 150 basis points, from a gross margin of 46.2% for the same period in 2015, principally driven by lower manufacturing expense, favorable material costs, and price increases on certain products partially offset by decreased net sales.

Please turn to slide six of the presentation for the Q2 2016 sales performance summary. North America on highway end market net sales were down 5% from the same period in 2015, principally driven by lower demand for highway series and rugged duty series models principally offset by higher demand per pupil transport, shuttle series models. North America Hybrid Propulsion Systems for transit bus end market net sales were down 20% from the same period in 2015, principally driven by lower demand due to engine emissions improvements and non-hybrid alternatives. North America Off-Highway end market net sales were down 90% from the same period in 2015, principally driven by lower demand from hydraulic fracturing applications. Defense end market net sales were down 3% from the same period in 2015 principally driven by lower demand for track defense, partially offset by higher demand for wheel defense.

Outside North America On-Highway end market net sales were up 1% from the same period in 2015, principally driven by higher demand in Europe, partially offset by lower demand in China buses, and India. Outside North America, Off-Highway end market net sales were down 63% from the same period in 2015, principally driven by lower demand in the energy and mining sectors. Service parts, support equipment and other end market net sales were down 5% from the same period in 2015, principally driven by lower demand for global off-highway service parts and North America support equipment.

Now I'll turn the call over to Dave.

Thank you, Larry. Please turn to slide seven of the presentation for the Q2 2016 financial performance summary. Given Larry's comments I'll focus on other income statement line items and adjusted EBITDA.

Selling, general and administrative expenses increased $2 million principally driven by 2015 favorable product warranty adjustments, partially offset by lower intangible amortization. Engineering, research and development expenses decreased $1 million, principally driven by decreased product initiative spending. Interest expense net increased $5 million from the same period in 2015, principally driven by unfavorable mark to market adjustments for our interest rate derivatives. Cash interest expense decreased $14 million from the same period in 2015, principally driven by the second quarter 2015 refinancing of our 7 1/8% senior notes.

Income tax expense for the second quarter of 2016 was $38 million resulting in an effective tax rate of 38.6% versus an effective tax rate of 37.5% for the same period in 2015. The increase in the effective tax rate was principally driven by an increase in estimated taxable income for certain foreign entities. Net income for the second quarter was $61 million compared to $54 million for the same period in 2015.

Adjusted EBITDA for the quarter was $173 million or 36.5% of net sales, compared to $186 million or 36.3% of net sales for the same period in 2015. The decrease was principally driven by decreased net sales in 2015 favorable product warranty adjustments, partially offset by lower manufacturing expense, commensurate with decreased net sales, favorable material costs, and price increases on certain products.

Please turn to slide eight of the presentation for the Q2 2016 cash flow performance summary. Net cash provided by operating activities increased $18 million from the same period in 2015, principally driven by decreased operating working capital, lower manufacturing expense, commensurate with decreased net sales, favorable material cost, price increases on certain products, and decreased cash interest expense as a result of the second quarter 2015 refinancing of our 7 1/8% senior notes partially offset by decreased net sales and the second quarter 2016 of stockholder activism expenses. Adjusted free cash flow increased $18 million from the same period in 2015, principally driven by higher net cash provided by operating activities partially offset by the second quarter 2016 payment of stockholder activism expenses and increased capital expenditures.

Allison continued its prudent approach to capital structure and allocation during the second quarter by settling $59 million of share repurchases, paying a dividend of $0.15 per share and repaying $6 million of debt. We ended the quarter with a net leverage of 2.98%, $364 million of cash, $462 million of revolver availability and $102 million of authorized share repurchases capacity.

Now I'll turn the call back over to Larry.

Before I jump into the Q2 2016 full year guidance update, I want to correct one thing one of my colleagues pointed out, that the gross margin for the quarter, I misstated as 47.5%; it was 47.7%, which of course accounts for the 150 basis points increase from last year's 46.2%.

Given recent unfavorable demand conditions, updates from the OEMs and end users in the global off-highway and North America on-highway end markets, we are updating our full year net sales guidance to a decrease in the range of 9.5% to 10.5% year-over-year. Despite our previously muted expectations for second half global off-highway net sales volumes, the impact of persistently low energy and commodity prices appears to be driving more severe production and inventory reduction actions by OEMs and end users.

In response to the scale of these actions, we have reduced our global off-highway end market second half new unit net sales assumption to $5 million and cut the global off-highway end market second half service parts net sales assumption to be flat with the first half.

Over the past month, the frequency and scope of production schedule reductions by North America on highway OEMs have intensified. As we previously stated, the outcome of midyear OEM shutdowns and any additions by the OEMs in the remainder of the year could impact our full year net sales assumptions. Our data suggests that Allison relevant market weighted OEM second quarter shutdown days were up year-over-year.

In addition, the OEM second half shutdown days are also expected to be up year-over-year. In response to these unfavorable production schedule developments and continued increases in Allison-relevant vehicle inventory to retail sales ratios, we have reduced our second half net sales assumption for the North America on-highway end market to down 14% year-over-year.

As we've done during other periods of meaningful uncertainty, Allison has implemented initiatives to further align costs and programs across our business with current end market conditions and opportunities consistent with our strategic priorities. Despite Allison's heightened focus on controllable activities, we remain strongly committed to product development, core addressable markets growth and the delivery of solid financial results.

In addition to updating our net sales guidance, we're also updating the guidance for adjusted EBITDA margin to a range of 33.25% to 34% and adjusted free cash flow to a range of $415 million to $435 million. Allison is affirming the remaining guidance released to the market on April 25th, specifically capital expenditures in the range of $65 million to $75 million and cash income taxes in the range of $10 million to $15 million.

Although we are not providing specific third quarter 2016 guidance, Allison does expect third quarter net sales to be down sequentially and year-over-year. This concludes our prepared remarks. Operator, please open the call for questions.

Thank you. At this time, we'll be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star, two if you like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. As a reminder, we request that you each ask one question.

Thank you.

Our first question comes from the line of Jerry Revich with Goldman Sachs, please proceed with your question.

Hi, good morning, everyone. Dave, can you bridge for us the gross profit of performance on a year-over-year basis? What was the magnitude of price increase and raw material benefit and can you comment on how you expect the cadence of pricing and raw materials to play out over the back half of the year assumed in your guidance? Thanks.

Sure. The pricing for the quarter year-over-year was roughly $2 million. As we said, on certain products, we had, I would say, favorable development relative to managing costs as Larry mentioned in the prepared comments. We continue to really focus on the things we can control. So we've taken that position throughout the year and look to continue focusing in that process on the second half.

If you look at the balance of the drivers in the quarter, did about $6 million in lower manufacturing expenses. Again, trying to, as best we can, align costs with the volume experience that we've had, and about $2 million on material cost. So and I would say overall certainly, you know, a decent performance given market conditions that being said, I think the positioning for the second half as we've laid out with the guide, continue to take a very hard look at a number of different programs lining with current benefits as well as continuing to support the strategic initiatives on a spending cadence.

Thank you.

Thank you. Our next question comes from the line of Robert Wertheimer with Barclays. Please proceed with your question.

Thanks and good morning, guys. Really, the question is, I mean, that you got some very, very depressed end markets at this point, I guess some of them definitely bottomed. Are you seeing any hint of inquires on and I'm not exactly expecting it yet but I'm just curious about the pacing. Inquiries are when you expect recovery in the frocking markets.

You know, the oil has firmed up a little bit now, it's weaker but the fleet will eventually need to get rebuilt and I'm curious about what you think, well, are they hearing it or when you think the timing might be.

Well, you know, we certainly follow the folks that are in the servicing space pretty closely, and certainly in the most recent calls, I would cite the Halliburton and Schlumberger calls. Halliburton, of course, one of our large customers in that space, talked about some of the tonality of some of the discussions. We certainly don't see anything this year. The question is going to be what does 2017 look like vis-a-vis 2016. You know, it would be safe to say it would be hard to imagine it being down, given where we're coming out of the year. The question is, will it be carryover or up, and if up, how much. We're certainly not anticipating a robust recovery, but we're going to take a look at it as we do later this year, speaking with our customers and folks out in the field to see what, if anything, we can expect as a bump up to 2016.

Okay. Thanks.

Thank you.

Thank you. Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.

Hi, good morning. I guess just another -- you know, another question, you know, on guidance. You know, one I just want to confirm, I think you said North America on highway is now down 14% for the year? And I guess, David, my second question, just the -- you know, your margin performance for the full year is impressive, but, you know, it implies a pretty significant drop off in adjusted EBITDA margins in the back half of the year and, you know, some -- you know, some pretty depressed -- I guess worse decremental than I would have thought. So can you help me through that? Is it mix because it's North American on-highway? Is it -- do, you know, you assume any of the costs that you guys are talking about helped the back half of the year? Is it -- cost? It just seems much worse than I would have thought. Thank you.

I understand as we have laid out our assumptions on cadence of production with a number of OEMs specifically in North America. You know, we also have a season to believe light Q4. We don't expect that to change this year.

So historically with us, typically it's been 55/45 in terms of volume for the year. This year we've, you know, certainly saw first half be heavier in certain cases with volumes, so, you know, it becomes a challenge in the second half relative to manufacturing costs, absorption, et cetera. So we've assumed the typical seasonality plus, frankly, what we believe is some timing and volume that was pulled into first half versus second half.

If you look at the overall implied end market sales changes year-over-year, it's very heavily weighted towards North America on highway, which as you know has very attractive incrementals for us, or detrimental, depending on how you look at things. The balance, you know, I would say, in terms of off-highway, that's another one that has very high detrimental that's an issue but I would say that the key driver in the first half/second half story is going to be North America off-highway down second half versus first half.

So the balance of the cost, as I said, I think, you know, we're driving to whatever opportunities that are there. I would certainly not describe our guidance relative to costs at this point as being overly optimistic, so I think we're, you know, continuing to work a number of opportunities there and I think our prior experience and tonality there would certainly tell you that we, you know, believe there's some opportunity there for the second half. At the same time, we do have priorities that we're continuing to pursue both on the commercial side as well as product development.

Thank you, that was helpful. I'll get back in queue.

Thank you. Our next question comes from the line of Ian Zaffino with Oppenheimer. Please proceed with your question.

Hi. I just want to drill down a little bit on the, on highway business. You know, when you're talking to your customers again, are you basically -- what's the main pushback? Is it that their business isn't good? Is it that, you know, they don't need any new trucks right now? What is sort of the general kind of pushback you're getting as you try to, you know, work that market?

Well, from an end user standpoint, obviously they're trying to sort out the general economic conditions, which are going to drive their business, obviously, that varies by end market. If you take a look, you know, school bus, the school bus end market was up tremendously in the second quarter, up 29% year-over-year, as we dig into that with the three major OEMs and as they have independently talked to us, they've indicated that they see a non-traditional shift from March through August to one that's more like March through June, and certainly we've seen, as we were putting together this forecast, we certainly did that in the context of looking at what the orders looked like for July and how that was shaking out.

And it would appear it supports it a little bit of their -- of -- maybe not their explanation but certainly in terms of the net outcome. So, you know, as we've taken a look at each one of the markets, tried to understand it, one of the things that is probably driven our outlook for the remainder of the year, certainly has driven it the most, is the OEM discussions we've had relative to what their order boards look like, what they have done, in some cases where they have taken a shortfall in class eight tractor orders and used some of their production capacity to pull in medium duty and class H straight truck.

And so you would look at the build rates and ask yourself, well, how was that going to play out the rest of the year, and certainly that's been a factor. Out of all of the customers in the plants that we have that we have tracked very closely as major consumers of Allison product, one of them is raising their line rate, at least as they plan right now, the others have cancelled, either lowered line rates or cancelled plans to increase their line rates, and/or have added down days into the schedule.

Now, that can turn. You know, they can turn around and we do a similar thing, we try to staff at a -- to manage cost, we staff at a baseline. We were not staffed at the levels of schedules previously. We had overtime days in because if the schedule moves down, it's easier to pull overtime days than it is to try to move around labor. Not only from an absolute cost standpoint but the hidden cost of all of the bumping that occurs when the contract terms for shift preference and job preference are played out. So it's a lot smarter way to go. So, you know, really, it's those factors that have played out here in recent weeks that have resulted in our update to the top line guidance.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Ross Gilardi, with Bank of America Merrill Lynch. Please proceed with your question.

Thanks, good morning. Maybe, Larry, maybe on that point, can you just elaborate a little bit and tell us what you're seeing with respect to, you know, downstream inventories of, you know, Class 6 to 7, you know, trucks and some of your other end markets? I mean it's pretty clear there's been a dealer inventory issue in the -- you know, the class eight line haul market, but are you starting to see the same thing in the medium duty market?

Well, I will say this. To the extent that the OEMs are reacting and will react to the manner in which I've described, I give them credit because it would probably be from a historical standpoint, one of the quickest reactions to what we're seeing.

But if you take a look at the ACT data. For class 8 straight truck inventory to retail sales, you know, you had a period in the middle of 2015 where it had been brought down into the range of inventory to retail sales ratio, the norm, I guess -- you always have to be careful when you talk about norms because those can evolve over time. But was certainly in the range and of course that's a factor of two things, the inventory and of course the retail sales, hence the ratio.

It got out of whack in the fall, brought back, you know, with some of the spikiness of some of the sales but we've got a couple months where it's trended up just outside the range. So it's not, you know, it's not wildly out of control like it was at points in the past. But it certainly is trending in the wrong direction.

You know, Class 6, 7 truck inventory to retail sales ratio, that's been edging up ever since the first of the year and so you do see -- you do see some activity. And, again, to the extent that orders have been pulled in to produce, you wouldn't even see that in the inventory to retail sales numbers, although that would affect future production schedules. And I think that's what the OEMs are reacting to. Again, you know, at the end user level, some of the uncertainties that I'll touch on later in concluding remarks clarify, you know, you can see that turn fairly quickly.

And, again, we're positioned to respond to that, we're just taking a fairly prudent approach to how we're structuring ourselves and managing costs here in light of the recent information.

Got it. Thank you. And then just to drill down a little bit more on the guidance revision, so basically it looks like you've -- you know, you've trimmed the revenue outlook by about $50 million at the midpoint. And can you just break that down into those three or four buckets that you mentioned in terms of where that's coming from? I know you gave some detail on that, but I wouldn't mind reviewing.

Sure. This is Dave. The -- in terms of the guidance, if you look at the revision, it's about at the midpoint about $40 million, give or take versus to the original guide of the year. So North America on highway, as Larry reviewed, is the largest portion of that.

In addition, as we mentioned, some downward adjustment to the global off-highway new units sales and in addition to that for off-highway the aftermarket piece as well. So we had assumed in the original guide some level of improvement in the second half on off-highway aftermarket based on the feedback from the channel, the amount of -- again, back to Larry's comments on the on highway side, which are larger applicable to global off highways, significant amounts of inventory in the field at this point in the channel as well as finished vehicles is, you know, very concerning to us, and really no significant improvement as we've gone through the year, so we've reflected that as well in the guidance.

Again, the idea being, utilization rates being low, aftermarket we would expect to lead off-highway out of the current trough. Having said that, it's a very low consumption apparently so we're not seeing a lot of, you know, positive developments there. So those are the biggest changes in terms of reductions. We did improve the outside North America outlook on highway for the year so, again, the strength that we've seen in Europe as well as parts of Asia we've reflected in the guidance adjustment as well.

Okay. Dave, sorry about that. There was a lot of back and forth between on and off-highway. In the aftermarket, is it off-highway or on-highway that you trend?

It's off-highway.

It's off-highway. And how much of the $40 million is off-highway within the spare parts business?

It's in the $10 million to $15 million range.

Got it. Thank you.

The other thing that goes along with that, it's a smaller part, without question, but support equipment is also in there, for new unit equipment and when we bring down new unit volumes such as we've done in North America, you do see a little take-down as well in the support equipment segment.

All right. Thank you, guys.

Thank you. Our next question comes from the line of Neil Frohnapple with Longbow Research. Please proceed with your question.

Hi, good morning. And congrats on a great quarter. Does the updated full year sales guidance also incorporate any change in market share -- market share assumptions within North American on highway? I know you guys had incorporated loss of business at Ford due to its vertical integration in your initial guidance back in February but, you know, just curious if any assumptions have changed further. I think Ford has gained some share within US Class six to seven this year.

Yes, it's something that certainly we're all over. Our initial assumptions, I think, were 2.5% share drop in that space, based upon relatively stable, maybe slightly down penetration for Ford, and as you've pointed out, they're actually up, noticeably, in the first half. The thing we're sorting through and trying to understand is how much of that is what you might call a more permanent or durable shift in shares and how much of that is tied to the fact that Ford was out of the market, and so you would have a bit of pent-up demand there as they release their new product.

And that's the piece we're trying to sort through because that's, you know, a few percentage points in the net delta that played out in the first half that we're sorting through for the second half. But the Ford is the most significant piece of anything we're seeing. We think we're tracking in other spaces pretty much the way we laid it out but the Ford is the wildcard right now that we're sorting through.

Okay. Thanks, Larry. I'll pass it on.

Thank you.

Thank you. Our next question comes from the line of Larry De Maria with William Blair. Please proceed with your question.

Good morning, thanks. Thanks for the color -- the outlook and stuff. But if we could switch gears a little bit, there's been a lot of talk about electric trucks and buses recently. I'm just curious what kind of opportunity, threat, and how Allison will participate longer term, and just your general thoughts on this over the next couple of years. Thanks.

Sure. Well, there certainly has been a lot of dialogue and China has taken action as we talked about, particularly in the bus space, with a significant level of government support, whereby they've subsidized electric buses to cost less than a conventional bus, which of course is not the underlying economics but nonetheless that's been a social directive that they have engaged in. They're actually shifting the monies -- they're not -- they are cutting them in terms of the purchase of the vehicles but now they're -- they're investing in infrastructure to try to support those vehicles.

I'll offer some caveats first and then talk about where we're going. The first thing that -- setting aside economics, because economics can be supplanted with government policy and subsidies, but certainly economically, it's not a clear business case, but, again, those can be supplanted. The bigger issue is, what is the -- what is the technical capability? And that really hinges on batteries. You can get through a duty cycle, if you have a tremendous amount of battery capability in a pure electric vehicle.

It's interesting because some of the experience in China has been challenging, I guess I would say, because you either have to change very significantly how you operate the buses, which you can do, you can stop at the end of every route and have a charging station there and that's infrastructure cost, and then try to recharge the vehicle, or you change the route significantly so that the electric power you're able to put on the vehicle is able to get through the route. But, again, that's a very significant difference in operational capability.

Nonetheless, there's a lot of folks working on batteries, and we recognize both the interest as well as the -- as well as the potential should some of the technical issues be overcome, and so what we're doing is, we've got some development activities going on. It's interesting the new energy vehicles as they are called in China, that definition, there's some talk about that being expanded from pure electric to plug-in hybrid. And, again, I think that gets to some of the technical issues in terms of the ability to get through a route in a day.

So, you know, we're working to develop capabilities and in some cases we're looking at some products that would enable our existing products or their new variants of our products to be applicable in that space, as the technology evolves. So we're certainly not -- not blind to it but we do also recognize, unlike some of the headlines you read about in the newspaper, you know, what some of the technical issues are that need to be addressed in order for the technology to really take off. But we're certainly intending to participate in that space.

And that's -- thanks for that color but that's in North America as well as China that you intend to participate as the market develops?

Yes.

Thank you.

Thank you. Our next question comes from the line of David Leiker with Robert W. Baird. Please proceed with your question.

Hi, this is Joe Vruwink for David.

Good morning.

Larry, can you maybe give some on the ground color in regards to your international on highway segments? Because based on some of the industry data, China as a market was up 20%, even in buses, Europe was good, India is booming, and so the more modest growth being reported in your segment, there would seem to maybe be a disconnect between high end or low end, but any color on what's going on there.

Sure. First thing is, you know, you got to peel back to is what are the addressable markets that we're working to go after in each of those spaces, and as we've indicated, certainly some of the traditional Allison vocations in trucks and then in buses, you know, so sometimes the headlines of what the larger market has done is maybe more or less applicable, depending on the specific end markets that we're speaking to. Certainly China bus tier one cities with the new energy vehicles, and our current lack of an offering in that space has been -- has been a hit to us, and I think we mentioned that in some of the initial activities.

Certainly in China, some of the truck applications we're starting to see some traction there. Europe, some solid results there. Again, a lot of times the overall industry numbers are driven by the class 8 tractor market or whatever, the relevant over-the-road classification is around the world and those we don't really play in currently. So -- so that can drive the number up or down, frankly. And so you really got to look at some of the sub segments.

Latin America, we're starting to see some activity with the new releases with MAN, same is true in Europe, our sales to all of the major western European truck producers are up year-over-year. So we feel good about that. Got some work to do in India. I think we're positioning well, some of the bus tenders are going to play out the rest of the year. We feel good about that. But, you know, there's more work to be done. We would certainly acknowledge that, and it's certainly what the organization and the board is focused on.

Okay. Thank you.

Thank you. Our next question comes from the line of Tim Thein with Citigroup. Please proceed with your question.

Yes, good morning, and maybe looking a little bit further out, the question here on North America on highway, one of your larger straight truck customers, I guess more specific vocational customers, noted that they were planning for more down weeks here as we move into the back half of the year consistent with what you mentioned earlier, but they believe that, that should be able to correct this inventory overhang and that they're more positive about the outlook for 2017, and I think that's broadly consistent with one of the major industry forecasters' view of straight trucks.

I'm just curious, maybe if you extend the horizon a bit in terms of end user discussions about initial planning, you know, thoughts on 2017 for straight truck in North America. Thank you.

Well, certainly I'm not ready to jump into 2017 as we continue to try to sort through 2016, but having said that, I would agree that the actions that are being taken are, as we have them laid in to the rest of 2016, are in fact significant. So whereas in the past we might have said, look, here's some things they're doing but we don't see it as being -- we see it playing out a little differently than what's currently in the mix, I would say that what's in the mix would seem to address the issues at least as we understand the underlying demand. So I guess I would -- I would tend to agree with the comments that were offered.

Got it. Thank you.

Thank you. Our next question comes from the line of Seth Weber with RBC Capital Markets. Please proceed with your question.

Hey, good morning. I just wanted to ask quickly on the defense business, one of your wheeled customers there has been, you know, winning some contracts and pulling some production forward a little bit. Are you still expecting that business to be kind of flattish this year or do you think there could be some potential for better than expected results there? Thank you.

In terms of defense, the guidance update there, we have it up slightly versus the original guide. Having said that, to your point, with some of the reporting OshKosh has come out here with recently, starting to firm up their thoughts around 2017 is obviously important to us as well, so as I understand it, the JLTV kicking off with our rep deliver here, I guess this calendar third quarter and then reference to MATVs, the majority of that, I guess, that international order getting taken in their fiscal 2017.

So that's certainly helpful from an outlook perspective to start firming up schedules. Having said that, you know, we're still waiting for definitive contracts on the track side of our business for defense as well. But I would say overall, you know, slightly positive versus the original guide for this year. And again to Larry's earlier comment, not prepared to talk to 2017 at this stage, but certainly good to see schedules firming up at this point.

Right. And if you just would remind us of the mix, you know, wheel versus track, just as a percentage of revenue or how we should think about that?

Sure, you know, as we've talked in the past, you know, when you had the -- more of a ramp in terms of Middle East activities from the US perspective, wheeled was, you know, outsized versus track. That's come around to a more even, if not slightly larger position. So as we see the next couple of years playing out as we've talked about overall volumes, from our perspective, you know, we're going to have to see, I'd say, firmer steps in terms of track to give you a read on that, but overall, wheeled, you know, this concept of a bathtubbing as we've talked about and stepping out of that, the international side of things, frankly shaped up to be, I think, a larger opportunity for us in the medium term, but as the business currently exists, you know, you're still around give or take a 50-50 kind of split.

Okay. Terrific. Thank you very much.

Thank you. Our next question comes from the line of Joe O'Dea with Vertical Research Partners. Please proceed with your question.

Hi, good morning. It looks like cash in the quarter was the highest we have on record and I think last year in the third quarter you did step up some of the buyback activity, but just given those cash balances, could you talk about any kind of deployment plans in the back half of the year?

Yes, sure. Our capital allocation policy, as you know, is focused on getting the cash back to our shareholders, so the dividend of $0.15 per quarter stands. We've talked about, you start with a net leverage target at three to 3.5 times. None of that has changed in terms of our policy. We have $102 million remaining on the authorization that was granted from the Board back in the fourth quarter of 2014. That runs through the end of this year. Certainly our intention as we've talked about that topic before is to get that executed within the authorization timeline.

Okay. Great. Thanks a lot.

Thank you. Mr. Dewey, there are no further questions at this time. I'd like to turn the floor back to you for final remarks.

Thank you. Just a general comment. There's been a lot of dialogue over the outlook for the remainder of the year and obviously, you know, we're all watching that very closely, but, you know, during periods of insecurity and ambiguity, whether we look at it globally or even in one of our largest markets here, North America, between terrorism, some of the social tensions and a lack of clarity in the economic forecast, just look at the mash nation the fed is going through to try to sort through things. It certainly those factors create greater uncertainty, especially in capital goods industries.

Based on the information we've received but also the answers we have not received from OEMs and questions that we have posed, we've taken what we believe to be a prudent, some might argue conservative, approach to our top line forecasting. The next couple of months will go a long way to revealing the glide path for the remainder of 2016 into 2017.

However the industry proceeds, what you can expect from Allison Transmissions, as we have done ever since our spinout from General Motors, first as a privately-held company and since 2012 as a publicly traded company, our industry leading EBITDA margins that compare very favorably with those of other premiere industrial companies, and strong cash flow, conversion of that EBITDA, cash that we will deploy to our shareholders advantage through intelligent investments in our business and in return of capital as authorized and directed by our board of Directors.

Thank you for your time this morning. Have a good day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.